Biotech sector profitable at last thanks to increased efficiency

Companies in the world's established centres of biotech have reached aggregate profitability for the first time but only by cost-cutting and reducing research.

This is the conclusion of Ernst & Young's annual report on the sector, Beyond Borders, which also notes that while it was able to “weather the continued worldwide economic turmoil…the gap between the 'have' and 'have nots' in the industry” widened in 2009. It notes that companies in the USA, Europe, Canada and Australia had an aggregate net profit of $3.7 billion last year, compared with a $1.8 billion loss in 2008.

E&Y notes that the improvement was driven by a “dramatic increase in net profit in the US market due largely to the adoption of new cost-cutting and efficiency measures”. Revenues of listed biotech companies fell 9% to $79.1 billion, due to the exclusion of Genentech which was bought out by Roche.

Interestingly, companies in the US, Europe and Canada raised $23.2 billion in 2009, a 42% increase compared to the year before. However, “much of this was raised by a handful of established public companies in follow-on offerings, as access to capital for many companies remained scarce”.

The report goes on to say that biotech companies are now operating in what E&Y refers to as “a new normal”, where access to capital will remain difficult. With less available capital, “venture capitalists are being more selective and reserving funds for existing portfolio investments”, it says, with cash being direted at projects “with potentially faster returns instead of starting new companies”.

The analysis argues that companies need to “broaden the search for capital to include nontraditional (and non-dilutive) sources of funding” and use “scarce capital efficiently”. This includes designing studies to 'fail faster', “prioritise pipeline assets and work with third parties to unleash operational efficiencies."

E&Y adds that “the end goal in product development is no longer marketing approval but payor acceptance” and companies need to “invest early in pharmacoeconomic analysis to inform R&D decisions”. Firms are also advised to collaborate creatively and adopt partnering approaches that could “free them from turbulent public markets and give them much-needed resources”.

Glen Giovannetti, E&Y's Global Biotechnology Leader, said companies have “long confounded predictions on their ability to survive difficult economic conditions and 2009 was no different”. However, he added that the firms best poised for success “are those that can seize the opportunities latent in the near-universal need for increased efficiency”.